Snowball vs. Avalanche Methods of Paying Down Debt

More than one-third of adults in the United States are in debt, with the average amount owed hovering just under the $100,000 mark. Ouch.

For many of us, that debt can be traced back to student loans and mortgages. For others, being underwater could be the result of using credit on things like clothes and trips we can’t necessarily afford. Either way, once money is owed, that debt isn’t going to go away—unless you figure out a way to pay it down.

If you’re in debt, the snowball method and avalanche methods of tackling debt can be ways to get rid of all those pesky collection calls and take back control of your finances for good.

Check out this comprehensive guide to snowball vs. avalanche debt management, and see how you can take steps toward a free, less stressful financial future.

What is the snowball method of debt management?

Frosty the Snowman may have been a jolly, happy soul, but his corn cob pipe and button nose weren’t nearly as useful as this winter-inspired approach to debt management.

The snowball method focuses on paying off the debts with the smallest balances first, and then moving on to the heftier accounts. Think of it as building momentum, like a snowball that starts off at the top of the hill and gains speed and size as it rolls downward. The money you would’ve paid toward the accounts you’ve since settled can now be reallocated toward the remaining bills.

TV personality Dave Ramsey, a widely known personal finance guru, was the first person to popularize the concept of a debt snowball. The theory is that paying off smaller debts is both financially and psychologically rewarding. Think of all those checkmarks next to accounts you’ve settled in full! Plus, with the snowball method helping you achieve all those account closures, you’ll likely feel more motivated once you see clear evidence of your accomplishments/progress.

How to use the snowball method

Interested in using the snowball method to tackle your debt? Here’s how to get started:

• Create a master list of all your debts. List them in order from the accounts with the smallest balances to those with the most money owed. Leave out your mortgage, but include everything else, such as home equity loans, student loans, auto loans, payday loans, and medical bills.

• Plan out your monthly payments. You should be making minimum payments on all accounts except the smallest. For that account, you’ll pay as much as you can.

• Repeat steps 1 and 2 with each debt. You’ll work your way down the list, paying off one account at a time. As each account is paid off, you’ll use the money you were paying on that bill to start paying down the next.

Why does the snowball debt method work?

There’s nothing inherently magical about the snowball approach. You won’t suddenly find more money or make a dollar stretch further than it had been stretched previously (but wouldn’t that be nice?). Instead, this method is about changing your behavior.

When you’re faced with a mountain of debt and you are just paying the minimum on all of those accounts, the psychological impact can be devastating. All those collection calls, the constant influx of paper bills flooding your mailbox, the anxiety you get from paying a fortune in interest costs and never paying down the principal—it’s a real bummer.

With the snowball method, you score a win that, in turn, makes you feel like a winner. You’re not just spinning your wheels, you’re actually paying off accounts. That’s one less company hunting you down and one less reason to screen all your calls. That debt is gone forever, and soon, the next debt on your list will be extinct too.

Talk about motivation.

What is the avalanche method of debt repayment?

The avalanche method of debt repayment, also known as a debt avalanche, is an accelerated debt repayment plan that focuses on paying extra toward the loans with the highest interest rates. The higher the interest rate on a given account, the more priority it gets when you’re deciding what to pay off first.

Tackling the loans with the biggest interest rates first may not produce a win right away, but it could save tons of money in the long run. When you pay off your first loan, you likely have a bigger percentage of your cash flow available to push to the next debt in line. As you knock items off your list, you pick up steam—or snow, like during an avalanche. Get it?

How to use the debt avalanche method

To use the debt avalanche method, you just need to follow a few simple steps:

• Make a list of all your debts. Prioritize them according to their interest rates, with the loans with the heftiest interest rates first and those with the lowest interest rates last.

• Plan your monthly payments. Make the minimum required payments on all accounts, and put any extra money toward the debt in the top spot on your list (aka the one with the highest interest rate).

• Work your way down your list. When you pay off the first debt on your list, take a moment to celebrate. Then, put the money you were paying on debt #1 toward debt #2. This process continues until you’ve worked your way down your list.

Just imagine how much money you’ll be putting toward those last few debts once your avalanche reaches the bottom of Mt. Debt Repayment.

Why does the avalanche debt repayment plan work?

The avalanche debt repayment is about the long game and building momentum. But it’s also about saving money. By knocking out the debts with the highest interest rates first, you’re saving the money you’d be paying in interest if that debt hung around for a few more months or even years.

The drawback of this method is that it can be demotivating or even demoralizing for people who need to see results right away. If the debt in the top spot has a large principal, like a $20,000 car loan or $150,000 in student loans, it could be years before you cross anything off your list. Feeling unsuccessful or like you’re not making any progress could lead to self-sabotage. You know, that voice in your head that says, “This isn’t working, so I might as well forget paying this debt and enjoy myself instead.”

Debt snowball vs. avalanche method: Which is better?

Faced with two approaches to paying down your debt, how do you know which is better? The truth is that it depends on what your brain and heart need to feel successful, on what your debt list looks like, and on whether there’s a big difference in interest rates or not.

If you prefer to see results quickly and need lots of fast wins to stay motivated, the snowball method is probably right up your alley.

If you want to play the long game and save money, even if it takes a year or longer to see a win, the avalanche method may be more your speed.

5 ways to improve your debt paydown strategy

Whichever debt repayment method you choose, having a strategy in place can help you tackle what you owe in a way that feels as comfortable and realistic as possible.

1. Try to go beyond the minimum whenever possible

The minimum monthly payment is the least amount of money you need to fork over to avoid a penalty and build credit. Obviously, if that’s all you can afford to pay that month, the minimum is perfectly fine. But if you can come up with any extra funds, put that into your payment as well.

For the snowball method, that would mean paying more on your smallest debt. For the avalanche method, pay extra on the one with the largest interest rate.

You’d be amazed how much difference an extra $25 added to a $100 monthly payment can make over the course of a year.

2. Track your spending

Start writing down everything you buy or pay for. A simple spreadsheet is a great way to track spending, and you can use built-in functions to organize expenses and add everything up to see where your money is going.

It’s not uncommon to start tracking your money and suddenly discover that the $6 smoothie you never thought twice about grabbing post-workout is actually costing you a fortune in the long run. Multiply that $6 times 8 (two workout smoothies a week, four weeks per month) and that’s $48 per month you could be putting toward debt instead.

3. Always rollover your monthly payments once an account is paid off

Once an account is paid off, the money you were paying toward that debt is not “extra.” It’s not available for a vacation or a fun night out on the town or for those awesome sneakers you’ve been eyeing for months. If you’re serious about repaying your debt, you need to roll over everything you were paying on the now-satisfied debt to the next debt on your list.

It’s super tempting to want to play around with that “extra” money. We get it. You deserve a treat, right? But trust us—nothing tastes or feels as good as getting rid of collection agencies once and for all.

4. Don’t borrow any more money

Unless there’s an emergency (more on that below), you should not be taking out any more loans or acquiring additional debt while you’re repaying what you already owe. That means no:

• Splurging on purchases you can’t afford

• Applying for new credit cards

• Taking out a loan to pay for another loan

If you do find yourself in a pinch, explore a Varo Advance¹ that’s fair, with no hidden fees or exorbitant interest.

5. Build an emergency fund

This is the one big exception to the suggestion above re: putting all your extra money toward paying down debt. Getting rid of your debt is vitally important, but it’s also crucial that you have a safety net in place so you can protect yourself and your loved ones just in case life throws a curveball.

Some experts recommend building an emergency fund before you tackle debt repayment. Others suggest paying into your savings account each month, the same way you’d make a minimum monthly payment on your debts. The high-yield Varo Savings Account comes with no fees and automatic savings tools, and can help you earn more on every dollar saved.

The exact emergency fund strategy you choose will hinge on your comfort level and resources. You may feel the need to funnel extra toward emergencies because your lifestyle presents a higher risk — perhaps you have health issues, or you know your car is a clunker that needs a mechanic’s TLC every couple months. Sometimes, it’s better to maintain the status quo on a debt (assuming making minimum monthly payments is part of that status quo) until you have enough funds on hand to take care of yourself in the face of sudden adversity.

Debt repayment can be a tricky process, and it’s almost never linear. Remind yourself frequently that it takes time to right the ship — after all, you didn’t get into debt overnight, so you can’t expect to pay it all off in a day or two either, but picking a strategy and sticking to it is all but guaranteed to produce results.

Looking for more ways to save? The Varo Bank Account comes with zero monthly fees, and there’s no minimum balance required. All that money you save on the maintenance fees and balance requirements demanded by traditional banks can be put toward your debt. That’s just how we roll.